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How This Slow-and-Steady Stock Can Make You Rich

Altria's ability to grow profits and dividend payments year in and year out, despite calls for tobacco's demise, make it an ideal long-term holding.

Sin stock investing, particularly when it comes to tobacco stocks, is an endeavor fraught with hurdles. Critics of the strategy frequently cite the social stigma of tobacco, as well as statistics showing the decline in smoking rates in the United States and the ire of the health-conscious consumer.

While all true, don't be fooled: Altria Group(NYSE:MO) isn't going anywhere. The company behind Marlboro, in addition to many other brands, has pumped out profits and dividends for decades on end, and will continue doing so for many decades to come.

There's something to be said for consistency

You'll never see Altria featured in the financial media as the next great growth story. A centuries-old industry isn't likely to be considered the sexy new investing idea.

At the same time, investors should consider Altria's consistency a virtue. The company has a history that stretches back more than 180 years. Formerly the Philip Morris Companies, Altria slowly built a stable of successful brands. Its tobacco offerings include the juggernaut Marlboro brand. Through its acquisition of UST, Altria has smokeless tobacco brands, including Skoal and Copenhagen. Altria also owns Ste. Michelle Wine Estates, John Middleton cigars, and a sizable stake in brewing company SAB Miller.

Over the last century, Altria has held two core beliefs at the heart of its management strategy: steady profit growth, and strong dividend payments to shareholders. Those two elements are the major reason why Altria was the best-performing stock from 1925 to 2003, according to noted economist Jeremy Siegel.

Altria gives investors what they want

Despite calls for the tobacco industry's imminent demise, Altria's recent results only served to bolster the company's reputation as one of the most consistent stocks your money can buy.

Altria's second-quarter and first-half results were just what investors should expect. Altria grew its adjusted diluted earnings per share, which excludes special items, by 7.4% in the first half of the year. Moreover, the company revised its full-year 2013 outlook. For the full year, Altria expects adjusted diluted EPS to come in between $2.36 per share to $2.41 per share, representing 7% to 9% growth versus 2012.

As if that weren't enough, Altria recently delivered yet another dividend increase, which long-term investors have come to expect. Altria bumped up its payout by 9%, and after the increase, the stock now yields an impressive 5.6% at recent prices. All told, Altria has increased its dividend 47 times in the last 44 years.

Not only that, the company announced it had expanded its share buyback authorization by $700 million, from $300 million previously to $1 billion. Management expects to complete the buyback program by the end of the third quarter 2014.

Like Altria, tobacco rivals Lorillard (NYSE:LO) and Reynolds American(NYSE:RAI) are counted on for their dividends, which stand at roughly 5%. And, Lorillard and Reynolds American trade for between 14 and 17 times EPS, right in line with Altria's valuation. Because of this, it's easy to group the three tobacco titans together and assume they're one and the same, but that would be a mistake.

First, both Lorillard and Reynolds American are much more heavily reliant on menthol cigarettes than Altria, a product that is undergoing enhanced regulatory scrutiny. Recently, the FDA said it would look into more heavily regulating menthol cigarettes. On the topic of menthol cigarettes facing regulatory danger, there's real precedent to fuel the fire of those fears. In 2011, an advisory committee within the FDA ruled that removal of menthol from the tobacco marketplace would benefit public health greatly. It's unclear if the FDA could outright ban menthol, but the fact that it's a possibility is reason enough to be wary of menthol.

Moreover, Lorillard and Reynolds American simply can't match Altria's brand power. The Marlboro brand is one of the most recognizable brands in the world, and by itself controls 43% of the retail share of U.S. smokeable products.Even among smokeless products, Altria dominates. Its Copenhagen and Skoal brands together control 51% of the retail share of smokeless products in the United States.

Learn to love Altria's reliability

Lorillard and Reynolds American are profitable companies and offer compelling dividends, but Altria's unparalleled brand and diverse operations make it the best buy within the tobacco industry.

It's true that the number of smokers is declining, and will continue to decline. At the same time, it's a simple reality that human beings have vices, often distasteful ones. As a result, it's foolish (small f) to think that tobacco will disappear entirely.

If you're tired of enduring the market's wild swings, Altria's slow-and-steady nature should appeal to you. Instead of taking a flier on a speculative company that might not be around in 10 years, Altria will reliably deliver strong returns for many decades to come.

Author

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.